Better Due Diligence Would Have Turned Up More Clues About Nikola Founder Trevor Milton: Financial Times

Investors may have found warning signs about Nikola Corporation NKLA founder Trevor Milton if they had bothered to look, Financial Times reported today in one of its regular "Big Read" features.

Due Diligence Gaps: The British newspaper dug into Milton's business history, speaking with with past employees, customers, advisers and investors, who said Nikola was the latest in a string of Milton's business failures. 

"It is a tale of company failures and lawsuits that beg the question of why investors did not look more closely at Mr Milton’s business history," FT reported.

Milton's previous company, dHybrid Inc., a maker of hybrid fuel systems for diesel trucks, ran into quality problems and lawsuits. Workers were sent across the country to fix the "under-engineered" systems, former employees said.

A major customer sued dHybrid for misrepresenting its products' capabilities. The case was dismissed.

Milton's earlier ventures included a failed home security business and an ecommerce website.

One Nikola investor said his company did not undertake due diligence because of the credibility it placed one of Nikola's existing investors.

Why It Matters: Nikola and General Motors Company GM announced a deal in September, but it quickly unraveled after short seller Hindenburg Research published a report questioning Nikola's product claims. This famously led to the revelation that Nikola had rolled one of its hydrogen-powered vehicles downhill in a promo video to make it appear the vehicle was operating.

Milton subsequently resigned as executive chairman, though he remains the largest shareholder. (FT reports that it was personal allegations, accompanied by sexually-charged screenshots posted on Twitter, that led Milton to quit, not Nikola's falling share price.) 

GM last week dropped its earlier agreement to take an 11% stake in Nikola. It also will not manufacture Nikola's Badger truck. GM will still provide some fuel-cell technology to Nikola.

The fallout also has raised questions about the use of SPACs to take a company public, the listing vehicle used by Nikola.

Price Action: Nikola's share price fell 14.6% last week on news of the much-reduced deal with GM, ending at $18.88. GM's was down just under 1% at $44.40 to end the week.

Meanwhile, short-sellers are cleaning up on Nikola's travails.